It’s difficult to ignore the doom and gloom. We would all like to believe
that we are in the midst of an astonishingly rapid recovery. But there are several
major outstanding issues that are destined to prevent that. Some people talk
of a Square-root shaped recovery...a "V" followed by a stable period. But
rarely has the market remained stable in recent times. Much more likely,
even during a stable period, is a market fluctuating up and down 10 percent,
with no long-term direction.

Interest rates

They are essentially zero now. They can go in only one direction. As
they increase, the stock market will suffer because money markets
will start to look better, without risk. This will pull billions out
of the stock market, as investors have just seen a lost decade and are
more risk-averse than ever. More are also closer to retirement,
reducing risk appetites. Bond prices also naturally drop as interest
rates increase.

Housing glut

The trillions lost in home equity translates into years of lost
purchasing power for millions of potential investors. As people lose
money on forced sales, there will be more money coming out of the
market, or refusing to go back in.

Demographics

Baby boomers have just begun retiring. This is a 20-year population
surge of new retirees. Many will be moving to smaller homes, further
extending the housing glut. Incomes (and therefore expenditures) of
this huge group will be dropping significantly, as most have lost
much of their retirement in their 401k plans. Even those who still
have plenty wiill now be living off of their
IRAs and 401k plans, which means continuously pulling equity from their mutual
funds, draining the overall market. There is no replacement for this wealth
except a smaller number of replacement hires, at far lower
compensation rates…good for business expense, but bad for the
economy.

Figures don't lie...

…but liars figure. All past recessions in recent memory
were under 15 months long. Thus, when year-over-year results
improved, we were comparing to mostly “good” times. This recession,
at closer to two years long, has us comparing year-over-year corporate earnings
with completely dismal values from the depths of the recession.
Earnings up 20% over last year? That might be meaningful if last
year was healthy. But if earnings were close to zero, percentages
are completely meaningless. When EPS goes from a penny per share to
ten cents, that’s an increase of 1000%, but it may be immaterial for
evaluation purposes. And percentages are totally meaningless when
earnings are negative, as they were for a significant part of the
market. Our entire metric for understanding improvement is biased
and we have no valid mathematical representation for tiny changes in
revenue that push earnings from slightly negative to slightly
positive.

Enjoy your "low" taxes

Historically, income taxes at or near their lowest point, even as the
government deficit is at its highest point in history. Conclusion? Taxes
will have to increase or the government goes out of business. Every
dollar that goes to the government to cover debt comes directly out of
the economy. And the cost to service that government debt is going to
skyrocket when interest rates do increase. Once again, the box is closed on
all sides, with no room to move.

Too many missing jobs

The New York Times recently reported that, even at the fastest job-adding rate in
history, adding over 300,000 jobs per month it would take almost 5 years
to return to pre-recession employment. And yet, we have barely crossed
the threshold from continued loss of jobs. This also doesn't take into
account the roughly 3% job growth that is needed just to counter
population growth.

Energy costs

The cost of gasoline and other uses of oil took a crazy climb to over $4
per gallon in July of 2008. Then the price of a barrel of oil dropped
from nearly $150 to under $60. Now, we're finally seeing more
steady-state pricing around $80 to $90 per barrel. People are no longer
shocked by $3 per gallon gasoline. But when those prices drift back
above $4 per gallon, they will be looking for ways to reduce their
spending in all areas.

Un-stimulating

The federal stimulus programs are now winding down. Cash for clunkers,
home buyers incentives, and major government subsidies are beginning to
spend out or already done. There’s no oomph in the recovery to absorb those losses, and
we haven’t climbed back up the hill. Any “just one more time” stimulus will
increase most of the problems above.

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